According to the Federal Reserve, in 1990 the richest 1
percent of America owned 40 percent of its wealth -- the greatest level
of inequality among all rich nations, and the worst in U.S. history since
the Roaring Twenties. Furthermore, the richest 20 percent owned 80 percent
of America -- meaning, of course, that the bottom four-fifths of all Americans
owned only one fifth of its wealth.

Another revealing way of expressing this statistic is that the top
1 percent owned more than the bottom 90 percent combined.

What caused this growing inequality? The most
underlying reason may be that it takes money to make money. This is why
many call for a progressive tax system: to redistribute at least a percentage
of the wealth back to the middle class, thereby avoiding modern serfdom.
We will explore the tax cuts for the rich in detail in the next section.
But tax cuts are not the only way to polarize wealth. There are several
others, and they can all be lobbied through Congress. A complete list follows
in More.

Tax progressivity was highest in the decades after World War II,
when the rich were taxed a stratospheric 88 percent for nearly two decades.
This was also an era in which the U.S. economy was a juggernaut, and the
American Dream was indisputably alive and well. Because of this, most economists
do not believe that high tax rates on the rich are bad for the economy.

The following chart shows the effectiveness of a progressive tax
system. When the top rates were truly high from 1950 to 1978, American
income at all levels grew at about the same pace. But when progressivity
was lost in the 80s, the income of the poor began falling, while that of
the rich continued growing.

Economists have a standard measure of income inequality, called
the Gini Index. In this index, the higher the number, the greater
the income disparity between the rich and the poor. (0 = perfect equality,
1 = only one person in the economy has all the income.)

As mentioned earlier, the U.S. economy slowed in 1973 for reasons
still not completely understood. The average weekly earnings of nonsupervisory
workers -- about four-fifths of the civilian workforce -- peaked in 1973,
and have been falling ever since:

Presidents Reagan and Bush froze the minimum wage for 9 years, essentially
giving those workers a pay cut each year as inflation bit into their paychecks.
In 1992 dollars, the 1963 minimum was $5.74 -- or 35 percent more than
it is today.

*For brevity's sake, this chart omits the 15
minimum wage increases between 1950 and 1981. No newly introduced minimum
wage has ever been lower than 35 percent of the average wage, although
old minimum wages have certainly gone below this. For a fuller chart, see
More.

Economists previously believed that raising the
minimum wage would cost jobs, especially among teenagers. However, recent
research suggests that the truth might be a bit more complicated than this,
and that when the minimum wage falls too low (due to inflation), it can
be raised safely. For more on the controversy stemming from the Card/Krueger
study, see More.

On the other hand, the salaries of executives skyrocketed during the
80s:

Salaries and benefits of corporate CEOs as a multiple of the average
factory worker's6

1980 30 times
1991 130-140 times

And these super-salaries did not come primarily
from greater profits, but from a larger slice of the profits: (More)

Executive Compensation as a Share of Corporate Profits7

1953 22%
1987 61

The following chart shows the growth in the number of millionaires
and billionaires during the 80s. Notice that their numbers skyrocketed
in the years 1985-87.

Approximate number of millionaires and billionaires in the U.S., 1978-19888

Viewing the above chart more broadly, the total wages of all people
who earned less than $50,000 a year -- about 85 percent of all Americans
-- increased an average of 2 percent a year from 1980 to 1989, which did
not even keep pace with inflation. By contrast, the total wages of all
millionaires shot up 243 percent a year.

Defenders of the Reagan era claim that income mobility
in the U.S. is great enough to overcome income inequality. That is, if people
move up and down the income scale to a significant degree, then, over a lifetime, your
average income is going to match my average income. However, there are a few flaws
with this argument. First, income mobility in the U.S. is not even close to making
this a reality. (More.) Second, one could hardly
justify slavery on the basis that, for 1 percent of your life, you, too, will be
the master.

So who gets ahead, and who gets left behind? The single most decisive
factor is education:

Education, Experience and Wages10

Percent change in earnings
New Workers (1-5 years experience)from 1979 to 1987
Less than 12 years of school -15.8%
High school degree -19.8
16 or more years of school +10.8
Old Workers (26-35 years of experience)
Less than 12 years of school -1.9
High school degree -2.8
16 or more years of school +1.8

Some people claim that if the poor want to
get ahead, they should just return to college. However, the job market
can bear only a limited percentage of educated professionals, and there
is already a glut of college grads in most fields. This makes competition
the hallmark of today's meritocracy, which critics call destructive in
its extreme form. (More)

Although the following chart is one of the largest, it is also one
of the most important. This chart shows how the incomes of most American
families stagnated or fell during the 80s, with gains posted only by the
top 20 percent. It also reveals how supply-siders lie with statistics,
but more on this in a moment. For those unfamiliar with the term "decile,"
the 1st decile is the poorest 10 percent of the population, the 2nd decile
the 2nd poorest, and so on.

Average Income Level and Effective Federal Tax Rates in Each Family
Decile by Year, in 1988 dollars (Corporate income tax allocated to capital
income)11

As you can see, the majority of American families were worse off
in 1990 than they were in 1977, at the beginning of Carter's presidency!

When supply-siders talk about family income in the 80s, they are always
careful to use 1980 as a benchmark for their comparisons, and never 1977.
This is because the recession of 1980-82 was the worst since World War
II -- perfect for comparing the later Reagan years in their best light.
But comparing the Reagan recovery to the non-recession year of 1977 puts
everything in perspective: most Americans lost ground, even at the end
of the recovery.

Which leads to the question: are presidents responsible
for creating recessions and recoveries? If yes, then Reagan deserves credit
for rescuing the economy from Carter's mismanagement. But if not -- which
is what almost all mainstream economists believe -- then the supply-sider's
praise of the 80s rings hollow. In that case, it is natural for recessions
to be followed by recoveries, and supply-siders might as well take credit
for the incoming of the tide. In reality, the Chairman of the Federal Reserve
Board is far more responsible for influencing recessions and recoveries.
(More)

Supply-siders have a partial rebuttal to the above chart. They point
out that family size decreased during the 70s and 80s, which means that
less family income would cover fewer people, and therefore not lower their
standard of living. The following chart shows the long-term decline in
average family size:

Average Family Size12

1970 3.58 persons
1975 3.42
1980 3.29
1985 3.23
1990 3.17

But this counter-argument runs into a few others.
First, falling individual income is responsible for declining family size,
so to say that families are maintaining their standard of living despite
everything is missing the point. (More) Second,
the rather small decline in family size does not explain or justify the
massive income gains seen by the top 1 percent, while 80 percent of all
families are treading water.

The following chart shows how large a slice of the economic pie everyone
is getting. More specifically, it shows how much of the total national
income that each 20 percent of American families are making. As you can
see, everyone's slice of the pie grew smaller in the 80s except the top
20 percent, which grew. And the top 1 percent was responsible for most
of that quintile's growth, as the last chart reveals.

Percent of National Aggregate Income Received by Each Quintile (by
Family, in 1992 dollars)13

*Table reads that 51.4 percent of all adjusted pretax family income
in 1989 belonged to families in fifth or highest quintile. Quintiles are
weighted by persons.

A common defense of these charts runs something
like this: "How equally the pie is sliced is not as important as the
fact that the pie itself is growing. Our GDP grows almost every year, so
everyone benefits." But this argument becomes incoherent when paired
with the claim that America should be an unrestricted meritocracy. If competition
is the primary basis of American society, then how equally the pie is sliced
becomes significantly more important than the size of the pie itself. (More)

An even stronger refutation is that, over the
80s, as the pie has grown, 70 percent of the extra growth has gone to the
top one percent, with the rest going to the next 5 percent or so. The middle
class share has simply stayed the same size.15
This means that the average American worker is working harder, producing
more, and creating overall growth, but is not seeing any of the rewards.
And this largely explains why middle class anxiety, voter anger and economic
uncertainty are gripping the nation today. (More)

Next Section: Taxes
Return to The Reagan
Years Home Page
___________________
1 Internal Revenue Service.
2 U.S. Bureau of the Census, Current
Population Survey.
3 U.S. Bureau of Labor Statistics. The
"before tax" column is Measure 1 of the Gini Index. The "after
tax" column is Measure 15, which measures inequality after all taxes
and government transfers.
4 U.S. Bureau of Labor Statistics,
Bulletin 2445, and Employment and Earnings, monthly, June and March issues.
5 U.S. Department of Labor, Employment
Standards Administration, Minimum Wage and Maximum Hour Standards Under
Fair Labor Standards Act, 1981, annual and unpublished data.
6 Kevin Phillips, Boiling Point
(New York: HarperPerennial, 1993), p. 251.
7 Internal Revenue Service.
8 The statistics and estimates for
millionaires are drawn from multiple sources, according to Kevin Phillips
in The Politics of Rich and Poor (New York: Random House, 1990),
Appendix A, p. 239. The decamillionaire data for 1982-88 comes from Thomas
J. Stealey, Marketing to the Affluent (Homewood, Ill.: Dow Jones-Irwin,
1988). The remaining data comes from Forbes and Fortune surveys
of the richest Americans during the 1980s.
9 Internal Revenue Service.
10 Calculations based on L.F. Katz
and K.M. Murphy, Changes in Relative Wages, 1963-1987: Supply and Demand
Factors (Cambridge, Massachusetts: National Bureau of Economic Research,
1990).
11 Congressional Budget Office, House
Ways and Means Committee, 1992 Green Book.
12 U.S. Bureau of the Census, Current
Population Reports, P20-477.
13 U.S. Bureau of the Census, Current
Population Reports, P60-184; and unpublished reports.
14 Congressional Budget Office tax
simulation model, cited in U.S. House Ways and Means Committee, 1992 Green
Book, p. 1521.
15 This is the so-called "Krugman
calculation," which has successfully resisted various statistical
challenges by supply-siders. See Paul Krugman, Peddling Prosperity:
Economic Sense and Nonsense in the Age of Diminished Expectations (W.W.
Norton & Company, 1994), p. 138.